Stocks Rally Higher On Lower Volume, Much To The Dismay Of Those Who Panicked And Sold The Open

October 23, 2007

Nothing is more bullish in a stock market than when a market opens up at its LOD and rallies higher all day long and closes at its HOD. That scenario is made even more impressive when the market gaps lower like it did on Monday. And the last scenario that makes it perfect is to have higher volume. Darn it, it wasn’t perfect.

And that pretty much sums up today’s rally: it wasn’t perfect. To make a day like today perfect stock indexes would have had to open lower than the close on Friday (check), did it at its LOD (check on Nassy), rallied the rest of the day (check), closed at its HOD (check), and close higher than the previous days open (NO CHECK). If that situation would have happened, I would be slamming my fist on the table screaming that “we are going higher.” However, since the situation I laid out did not happen, I can not be super bullish about today’s bounce.

What I can say about today’s bounce is that “I told you so.” Those who panic in the stock market are doomed to a life of sub-par returns. And the reason for that should be clear. The stock market has some of its most wildly bullish days during bear markets and has its most bearish days during bull markets. This is what constantly is able to scare weak longs/shorts out of their positions into stronger hands before the trend can resume.

In my opinion, I believe that is what happened on Friday. After listening to CNBC and reading TONS of articles on Friday, I came away with a clear conviction that the selling would “probably” (I can’t predict the future so I can’t say for sure) be contained at the open. Those who were in the chat room over the weekend saw me state this. That I would rather see a gap down of 20 than a gap up of 20, after such heavy selling on Friday.

History has proven to me that after a nasty selloff, the next morning, if we gap lower by a wide margin ALMOST ALWAYS signals a short-term bottom. And that is what we got today. Now, with us knowing that the selling is over for now, how much longer can it last? I have to be honest with you I simply don’t know the answer. But take comfort in KNOWING that NOBODY else does either. Even though they tell you they do, trust me, they don’t.

Overall, what I am seeing in my portfolio is very bullish. Today, like on Friday, the stocks that did pullback in my portfolio did so on lighter volume and if they did selloff almost all of them put in bullish late-day intraday reversals. The few stocks that did selloff and required a partial cut loss were either very small speculative longs or were speculative stocks that have already put in some strong gains and have just suddenly given them up. The top CANSLIM type stocks that I sold to take profits in today was simply disciplined selling to raise some cash. So overall my top stocks and current holdings continue to look great which make me believe there is definitely more upside ahead.

Now, at the other end of all my scanning is the new stocks I am going long or short. There were no setups in any shorts tonight that would make a safe short. So then I expected to find some strong longs to confirm today’s move. Unfortunately, my two new longs tonight were both trash fundamental wise and pretty much overall chart wise were not the best. But definitely good enough to warrant a small long for some very big speculative gains (if they come). Besides that there were two adds. One was in a stock that has no fundies and the other was in a strong stock but the price action has increasingly become volatile which is normally bearish for the stock. But so far so well.

So, my current holdings say “clear skies ahead.” My new longs say “not so fast.” However, due to the lack of shorts I find it hard to think any real heavy selling is coming our way. However, I have known to be wrong before and being wrong up here would not surprise me. That is why I cut losses and take profits regularly.

Tomorrows market is shaping up to be a bullish morning. AAPL, GOOG, and ISRG are the three stocks I see making strong and noticeable gains after-hours. I happened to catch Cramer so I believe some of it is due to him. But it doesn’t matter these clear leaders are going higher with or without a Cramer push. These leader’s charts are simply so great and strong that they are going higher until the market turns. And even then I wouldn’t bet against these until the market really got weak.

With the great report from AAPL, I see that it was trading up around 17 points and ISRG was up around 26 points. This helped the futures overnight and I see, as of this writing, that the Nassy futures are up 15. Now someone who I respect a lot in the chat room was at first a bit concerned that maybe the gap higher in the futs weren’t good. He is technically right. I always have preferred gap lowers in a bull market–because of the scenario you saw today. The bulls come in and take the bargains, crushing the short sellers, and then sending the stocks racing even higher. However, if after a day like Monday, you get a gap higher followed by gains the rest of the day leading to the indexes closing near the HOD…well then you will have a very bullish setup.

It simply doesn’t get any more bullish short-term than and index gapping lower rallying to close at its HOD, then gapping higher the next day and rallying to a HOD close. If this happens, the bears will definitely be hurting worse than they already have been the whole year. I guess if you short BIDU and AAPL enough you eventually will get it right. I just hope the bears aren’t broke by the time they are right. Why not ride BIDU and AAPL on the way up…and then ride it down? I know, that must just sound so silly to the perma-bears like Kass, Ritz, and Fleck. The three blind mice.

Aloha and I will see you in the chat room. I hope everyone learned ANOTHER lesson. You would have thought most got it in February…no July…no now…but we will see this situation again. Soon, I am sure. ALOHA!

Posted by Joshua Hayes | Filed Under Market Commentary